China-U.S. Tensions Flare in Volatile Trading Day & Why Big Bank Profits Spooked the Market

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1:56Welcome to Prof. G. Markets. I'm Ed Elson. It is October 15th. Let's check in on yesterday's market vitals. The major indices fell on resurgent tensions with China. The Dow managed to recover its losses and end the day higher after Fed Chair Powell indicated that rate cuts are on the way. Meanwhile, the yield on two-year treasuries hit their lowest level since 2022. And finally, AMD shares rose as much as 3 % after the company announced a chip deal with Oracle. Oracle said it will purchase 50 ,000 GPUs from AMD, and its shares fell more than 3%. Okay, what's happening? New developments in the ongoing US-China trade war spooked the markets yesterday, just a day after they had rebounded from Trump's initial tariff threats and then his softening of his stance.

2:48First, the US imposed new port fees for Chinese vessels. These levies were originally proposed shortly after Liberation Day, but they only formally took effect yesterday. Then China fired back. They imposed similar port fees of their own, and they also announced sanctions on certain American shipbuilders. The S &P and Dow fell as much as 1.5 % on these fears of escalating tensions once again by noon. A U.S. trade representative said that President Trump and President Xi are still on track to meet, and the indices rebounded. But just before the closing bell, Trump accused China of committing a, quote, economically hostile act by halting American soybean purchases.

3:29And in retaliation, he said on Truth Social that the administration is considering a cooking oil embargo. The post triggered another sell-off and dragged the S &P back into the red in the final minutes of the trading day. So a lot of crazy tariff developments, a lot of confusing drama once again. So to unpack these developments, to explain what on earth is going on here, we are speaking with Alice Hahn, China economist at Greenmantle and host of the China Decode podcast.

4:02Alice, thank you for joining us on Prof. G Markets. Thanks, Ed. What a difference a day makes, I have to say. Yeah, exactly. We were just talking about this yesterday. We thought we had a handle on what was going on with China. Indeed, we're maybe seeing the trade war is back on. I mean, help us make sense of what has happened here. I mean, we had the tariff threats from Trump last week. Then over the weekend, he softens the stance. Then the markets appear to be happy about that. Markets go back up. And then all of this stuff happens today. And I'm looking at Trump back on Truth Social. He's calling China economically hostile.

4:40What actually has happened over the last couple of days here? I think ultimately both sides were caught off guard by each other's policies and reactions. On the first side, I would say China certainly miscalculated its policy. It thought it could, to borrow a soccer term, slip one past the goalie by basically expanding this framework of export controls for critical minerals, these five additional rare earth elements. And it didn't expect the Trump administration, I think, in hindsight, to act quite so aggressively. And certainly, if you think about the minutiae of the export controls for these rare asks, it is pretty significant.

5:22Now, China did try to walk it back. MOFCOM over the weekend saying that it ultimately wasn't tantamount to a ban. It was just going to limit based on a licensure regime where necessary. But I don't think that that has assuaged or allayed any of the fears from Washington, even although you've got Besant, the Treasury Secretary, coming out saying that a deal can still be made that Trump and Xi will likely still meet in Korea at the end of the month. Fundamentally, I think that it's created more hostility amongst the hawks in Washington who have already been in the camp that China is this long-term strategic adversary.

5:59I think what has been interesting in the first year of Trump's presidency is that he He has very clearly taken a more dovish position towards China. But I think what we've seen in the last few days is that how quickly, just as in Trump 1.0, that can shift again to a more hawkish bent. And certainly, I think Trump and his team are unhappy with the way in which China has weaponized rare earths. And I think we'll continue to see volatility on both sides, ultimately trending towards continuing conversation and wanting a deal. But this, again, shows how a deal is extremely difficult for both sides.

6:37We've gone past tariffs. We've added an impasse or a detente of sorts on the tariffs at 30%. But when it comes to these other aspects, whether it's port fees or it's export controls or purchases of soybeans, these other nitty-gritty matters are still very, very hard to iron out. And both sides believe that the other side is weaker than the other side believes. China believes that the U.S. is in a position of weakness when it comes to, certainly, tariffs and when it comes to rare earths. And America, again, per Besson's comments the other day, believes that China's economy is extremely weak because it is so trade dependent.

7:17I think both sides are fundamentally misreading each other, which is what is casting us back into a period of volatility. Yeah, I was interested to see Besson's comments that he made to the Financial Times. I was surprised that he would go to a newspaper and say these comments right when we thought that the tensions had eased, right when we thought that, OK, maybe things are going to be fine. And then Besson goes to the Financial Times. He says that these restrictions are a sign of how weak their economy is, how weak China's economy is. He says they want to pull everybody else down with them. And these are very aggressive statements to make and especially aggressive to go to a news outlet who you know are going to report on it.

8:00So I'd love for you to just break down why is Scott Besson saying that right now, right at the moment where we thought that maybe things were OK? I think ultimately the U.S. side wants to remain firm on this issue, on China basically weaponizing rare earth elements. So what they are trying to do is shift the narrative to show that China is the adversary, not just to the US, but to the Europeans, the Japanese, to other countries that are actually quite fearful of the way in which China is weaponizing its core technologies, including critical minerals. So I think that there's been a PR campaign by Washington over the last few days to try to turn this into a narrative in which China is the adversary.

8:49China is willing to use its largesse in critical minerals to strategically control and manipulate supply chains. I think that is clearly playing to an international audience. It's clearly playing to Brussels, to Tokyo, to some of these other would-be allies in the Western developed world. It remains to be seen if this is effective, but I think that ultimately, Besson is walking two sides of the same street, which is on the one hand, he wants to continue to talk to Halifeng, for instance, this week at the IMF meetings in Washington. But at the same time, he wants to be seen to be tough on China.

9:27I certainly think that this is probably the first innings of an administration that may take a more hawkish bent coming into 2026. I think it's not a coincidence that we have the midterms. There will be, I think, a legislative push in 2026 in advance of the November midterms for the Trump administration to take a more hawkish position on China, not just on trade and national security, but also technology. So I think that we're starting to see the tides shift again. And again, if you recall, trade war one, we saw a first innings in the trade war and then a follow-up in a tech war that was more explosive and volatile and prolonged.

10:09I think we're seeing similar patterns in Trump-Tikwono. One implication of this that came to mind was what this may do to the TikTok deal. I mean, the TikTok deal is, I would assume, largely dependent on some cooperation between the US and China. We now have this rare earth metal blow up, which is causing the Trump administration to get very upset and it appears to be re-implementing this trade war. Do you think this could have implications on this TikTok deal? Do you think this could affect the outcome of having a TikTok US? I would put TikTok US in a different category. I think fundamentally because that deal as it currently stands is still very advantageous to China.

10:58China didn't really have to sell or divest TikTok USA, the subsidiary. It effectively kept the status quo ex ante. It did concede on licensing the algorithm to the subsidiary in the US, but ultimately it didn't have to concede very much. So I think given that China didn't make huge concessions, given Trump really wants TikTok to continue to exist for domestic political reasons, I think that that deal, probably stays in its current form. I think separately, what is more problematic is what is going to happen in terms of other technologies, in terms of chips. Might there be more restrictions on chips and chip equipment from the US or from other countries going into China?

11:44I think that's very, very conceivable. Similarly, there are other aspects like biotech where China is still reliant on US equipment. I think there could be a ramp up there as well. And then the last thing that I will say is that ultimately the Trump administration, I think, will start to bring in more escalatory measures. It's already talking about stopping purchases of cooking oil. I think that a lot of other issues when it comes to trade and technology will come to the fore in the next few days because ultimately both sides are trying to gain leverage in advance of the talks if they do happen in South Korea and the end of October.

12:27So I think in the next week or so, we're in a sort of very volatile period in which both sides, I think, have an incentive to escalate in order to de-escalate. Yeah, the cooking oil embargo kind of made me laugh. It does feel as if he's grasping at straws here. It's anything to insult them. Okay, Alice Han is China economist at Green Mantle, host of the China Decode podcast, which you should go check out. Alice, we really appreciate your time. Thanks so much, Ed. Talk to you soon. After the break, the banks kick off earnings season. If you're enjoying the show, give Prof G Markets a follow.

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14:39We're back with Profit Markets. Earnings season kicked off strong with JPMorgan, Goldman Sachs, Wells Fargo and Citigroup all largely beating expectations boosted by a surge in trading and dealmaking. JPMorgan and Goldman Sachs posted massive profits with Goldman logging its best third quarter revenue ever. However, both stocks fell slightly following those reports. Meanwhile, Wells Fargo and Citi also posted very strong profits, with Wells Fargo raising its profitability target. Both of their stocks popped after the earnings. So some mixed reactions from Wall Street, but overall, an incredible quarter for all of the banks.

15:20JPMorgan's profits rose 12%. Citi's rose 15%. Goldman's rose 37%. Overall, amazing quarter, especially when it comes to investment banking, as we expected. Lots more M &A activity last quarter, so investment banking revenue was way up. That is partially why we saw such a good quarter for Goldman, which is more of a pure play investment bank out of these companies. But still, we have this slightly strange market reaction where JP Morgan and Goldman actually fell. So to help us make sense of this, we are speaking with Telus Demos. He is the writer and co-host of the Wall Street Journal's Take on the Week podcast.

15:59Telus, thank you very much for joining us on Profit New Markets. Thanks for having me. So we've seen all these bank earnings this week, pretty good across the board. We'll just start with what were your initial takeaways? What did we see in these bank earnings? The big headline is the same it's been the last few quarters, which is that it's a good time to be a very big bank. They have a diversified business model that means that when things are busy on Wall Street, they do well. When there are deals being made in corporate boardrooms, when there's a lot of trading activity in the markets, they have a business that benefits from that.

16:33On their consumer business, their consumers tend to be relatively more affluent, people who have a lot of banking relationships. They might have a mortgage, a bunch of credit cards, money in the checking account, wealth management. We know that, you know, people who have more money are doing well these days. Their stock portfolios are up. They're not overborrowed. So those people are doing well. Wall Street is doing well. The big banks are doing well. So we saw JP Morgan's profits were up. Citigroup's profits were up. Goldman's profits were up, especially up 37 percent. It appears that this is largely, I mean, it's both things.

17:11As you say, you see the consumer units that are doing pretty well. But it seems like the big trend, at least, that we're seeing is deal making is up. M &A and therefore investment banking. And that may explain Goldman's relative outperformance. Is that what we're seeing? That we're seeing like this explosion in investment banking? Absolutely. Goldman is a juggernaut in M &A dealings, right? Like they advise tons of deals. They make huge fees on those things. So when the deal-making environment is good, they're doing well. And that extends both to like companies buying each other. It also is when private equities firms are, you know, buying public companies and leverage buyouts.

17:55It also includes IPOs. It includes debt offerings. they're highly leveraged, as they say, to the deal-making environment. And while we haven't hit the 2021 heights so far and still to this point, I don't think that the deal boom that some were predicting when Trump took office has quite landed. Goldman talked about how its pipeline of potential deals is really strong. So they just see a lot of activity there, and that's very good for their business. It's a high return, really good business. One thing that kind of surprised us, however, is that despite these great quarters that we saw at Goldman and we saw at J.P.

18:37Morgan, record quarters in it by a lot of measurements, despite that, the stock dropped. The stock for J.P. Morgan was down and Goldman was down. Do you have any thoughts on why the market reacted the way it did? Yeah, I think there's a couple of things on the market's mind, if I may attempt to read it, which as we know is sometimes folly. But one thing that could disrupt that dealmaking boom is if corporate decision makers, if private equity decision makers suddenly feel a great sense of unease and uncertainty and what has the recent sort of back and forth on China and tariffs done other than inject a lot more uncertainty into the environment.

19:23So maybe markets didn't hear quite enough happy talk from investment bankers about that and their confidence. I also think that there's a bubbling of concern, and you heard this more on J.P. Morgan's call than you did at other banks, but it's a similar concern across the banks, is that things are too good. And how long can these good times really last this long? Things are too active on the deal side. There's too much credit extension happening. And, you know, what goes up must come down. And so I think the market might be starting to wonder, could it really get even better from here? And as we know, you know, markets are often about the future, not the past.

20:05So that might be something that was on people's minds. Yeah, two of the larger concerns that were raised. One was this potential of a bubble, an AI bubble. Jamie Dimon said that many assets, quote, look like they are entering bubble territory. So he just flat out said the word bubble. David Solomon spoke about investor exuberance. And then there was this other concern that you mentioned there, which are these credit market concerns. J.B. Morgan, they took this$170 million hit because they made a loan to this company called Tricolor, which turned out to be fraudulent. It collapsed. And then Jamie Dimon spoke a little bit about these credit market concerns.

20:48Could you elaborate on what those concerns are? One, in terms of the potential of the bubble and what that would mean for the banks, and also this this credit market froth that Jamie Dimon talks about. Yeah, when we talk about bubbles, we often immediately think of the stock market, right? We think of, you know, how can NVIDIA continue to go up as much as it has? But bubbles come in many forms and you can look at what's going in the credit markets and you can argue that that is a bubble. And you might measure that by looking at the spread, which is how much more you earn owning corporate credits than you do owning treasuries, right, which are risk-free, corporate credits have some risk, that extra return is really small, like historically small.

21:33It has not really been smaller at any time since, you know, by some measures, kind of the peak of the pre-2008 credit bubble that we had then, maybe even since the 1990s by some measures. So there's potentially a bubble on that side of the market as well. And so that raises the question of whether or not we're always talking about credit risk from the consumer point of view, right? Are people going to pay back their auto loans or credit card loans, et cetera? We talk about that all the time. We have a lot less visibility and conversation and in some ways data about what's happening with corporate, with companies.

22:09And what we wrote about happening with some of the recent bankruptcies, you mentioned Tricolor. There've been a couple of other sort of standout corporate bankruptcies recently that have roiled the credit markets a little bit. Those are companies that are exposed to what's going on in the economy, right? Things are happening with tariff policy, right? One of the companies that went bankrupt first brands was an auto parts supplier. We know that tariffs are a big part of what goes into cars and auto parts. Now, that's not the only reason that those companies might have failed. J.P. Morgan on the call talked about how, you know, these things sometimes expose risks that companies are taking, right?

22:53Like big policy changes mean that there might be something, companies that are highly leveraged or that are, you know, barely kind of making their payments or, God forbid, in some cases, allegedly doing fraudulent things that That can get exposed by these bubbly markets. You know, things are priced to perfection. These companies aren't perfect. So I think that that's maybe what's in the back of the market's mind and what people are thinking about in these credit markets is like what are we going to learn has been going on under the hood? when we thought everything was great, when in fact, all the things that we talk about, tariffs, immigration policy, you know, other kind of economic changes, what's going on in the labor market, like those things were affecting companies, but just not in a way we could see until all of a sudden some loss pops up.

23:40And I think that's what maybe investors are worried about is that the things that they can't see or that they aren't hearing about day to day are going to be the ones that end up hurting them. Yeah, it certainly seemed to be front of mind for Jamie Dimon, despite the fact they had this record quarter. These bank earnings, you know, we learn about the big banks whenever they report, and it's nice that they all kind of report at the same time. We get a general picture of how Wall Street is doing, and in this case, the picture is pretty good. They're all doing pretty well. It can also be kind of a bellwether moment for what is happening at large in the economy.

24:20I mean, Jamie Dimon, David Solomon, These are people who have very, very good oversight over what is actually happening in the economy. They get a lot of great data. Their job is to kind of figure out what's going on in America and react to that. Did we learn anything in these bank earnings about what is happening in the real economy in America right now? Did we get any insight as to what things may look like over the next few months? Well, like you said, these companies are run by people with access to enormous amounts of data and insight about what's going on in the economy. And so to the extent that they continue to run their businesses with the expectation that things are going well, they're going to – they expect more deals to happen.

25:07They are making loans that they think will get repaid. That speaks to their confidence that the economy will weather whatever storms come. But it also says something about their own businesses, right? Right. J.P. Morgan Chase is an enormous company with incredible resources, even if there was an economic downturn. J.P. Morgan might not feel it the way a lot of other companies do because they have such enormous resources. So I don't think that we can take what the banks say or do or their results as a direct read on the economy. I think we can infer a lot of things, but I don't think that it's a one for one relationship because the fact is that banks are more leveraged to the.

25:52to the financial economy. Here's something that's, I think, underappreciated about banks. When the markets are good, things are good for them. They make more money managing a larger amount of assets because prices are high. They might be lending larger balances. They might be getting more deposits because people are selling investments and depositing that money. So a rising market is good for the banks. And so in that way, they're more a receiver of what's going on than they are necessarily a driver of it. So I think that we can pick and choose different indicators. We can maybe draw comfort from things banks say about the conversations they're having with their clients.

26:33Those are good indicators. But I don't think that as the banks go, the economy goes is necessarily the lesson to draw from big banks. I mean, the U.S. economy is so vast that even banks as big as we have are not spanning the entire thing, nor are a lot of companies, like, as they say, financialized in a way that they touch the banks. I mean, maybe a small business has a credit card at a bank, but it's not like they're getting giant lines of credit and, you know, getting these services necessarily from the country's biggest bank. In fact, I've argued that if you really want economic indicators, you should really look at smaller and middle market banks.

27:12Those banks are much more touching a lot of the companies that are at risk, right? Because big banks' customers are also often the biggest companies. And those giant multinational corporations, whatever's going on in tariffs, whatever's going on in the economy, they have a lot of levers to pull. They're diversified. They're operating in other markets, et cetera. You know, if you're just a domestic kind of monoline company, you do one thing and that one thing is being, you know, challenged or disrupted in some way, that might be it for you. And so it might be a smaller bank that has an overall kind of larger relationship with you.

27:49And so you should really look at, you know, kind of the banks you've never heard of. You should be looking at their results just as much as you are at the J.P. Morgans and Bank of Americas and Goldman Sachs of the world. All right, Telus Dimas is the writer and co-host of the Wall Street Journal's Take on the Week podcast. Telus, we appreciate your time. Thanks for your time. I really appreciate you having me on.